Europe's Telecoms Incumbents: Friends or Foes of a
Single Telecoms Market?

CEO Summit of the European Telecommunications Networks’ Operators
AssociationsVenice, 25 October 2008

Ladies and Gentlemen,

This meeting here in Venice is quite an event, and I would like to thank
Telecom Italia for having organised it with skill and talent. You have brought
together all the main players in the European telecoms debate: the three
rapporteurs of the European Parliament; the acting President of the EU Council
of Telecoms Ministers; the Chairman of the European Regulators Group; and
representatives of the European Commission. You have made sure that the telecoms
incumbents of most EU Member States are represented today. And you have also
invited US operators and regulators to join us. This already enabled us last
evening to start discussing, during a very interesting
evening[1], the "Policy challenges for
the global telecoms industry", which you have chosen as the title of
today’s discussions.

The fact that you, with your colleagues of Europe’s telecoms
incumbents, manage to bring together this kind of audience shows your enormous
influence in the telecoms debate. In many ways, our meeting today is comparable
to an informal Council of Telecoms Ministers – or even a "trilogue"
between the 3 institutions. And I am well aware that the position of most
telecoms ministers in Europe on telecoms regulation is not that far away from
that of their respective national telecoms incumbent.

The special relationship between Europe and its telecoms incumbents is thus
naturally the topic which I would like to address this morning. After speaking
about the history, the economic situation and the perception of telecoms
regulation, I will also make some remarks about the current financial crisis and
Europe’s evolving single telecoms market.

1. Europe and its telecoms incumbents – a relationship of fruitful
tension

Europe's telecoms landscape is special, and certainly different from that of
the United States. This is chiefly because of Europe’s 27 telecoms
incumbents.

Most of Europe's incumbents share the same history: They were formerly
public administrations enjoying a national monopoly for the provision of fixed
voice telephony. Following the EU decision to open the telecoms markets to
competition, these public administrations were forced to transform themselves
quite radically during the 1990s. You had to adapt to a new market environment,
get used to being challenged in your leading market position by new market
entrants and get used to telecoms regulation. I know well that this was not
always an easy process for many national telecoms incumbents. And it is quite
clear that in the regulatory departments of many telecoms incumbents –
often divisions of 50 to 100 regulatory experts, many of them formerly working
in the national telecoms ministries –, there was initially not a lot of
love for the European Union and the European Commission which had triggered this
process of market opening.

The magnitude of this transformation of Europe’s telecoms markets can
be compared with the process which started in the US with the break-up of
AT&T in 1984 and the creation of the national long distance companies as
well as the seven regional Bell operating companies. But Europe’s process
of transformation was less radical:

We in Europe did not choose the revolutionary method of breaking-up
telecoms monopolies by means of competition law. We choose instead the softer,
evolutionary, but also more time-consuming path of regulating the former
telecoms incumbents by sector-specific rules administered by national telecoms
regulators – a process which has been remarkably successful in the
past and which is possibly very typical for the special European approach to
regulation. However, it is also a process which is not yet completed, but still
ongoing.

Up to now, there are two main differences between the US telecoms markets
and the EU situation:

First of all, the US achieved, partly thanks to the radical shake-up of the
market in the 1980s, a considerable degree of infrastructure-based
competition. In the US, we have today the long distance and local telecoms
operators, as well as strong cable operators, which have a market share of 55%
in the US broadband market. In contrast to this, we in Europe have mostly
vertically integrated operators and a much lower level of infrastructure-based
competition, with some exceptions to this only in Belgium, the Netherlands and
Denmark.

Secondly, as the US implemented regulation on a nation-wide level under the
guidance of the Federal Communications Commission, the US is today characterised
by a telecoms market of continental dimension. This has given rise to the
creation of regional operators providing seamless services to their customers
across the federal states. In contrast to this, we in Europe have entrusted
regulation initially to the national telecoms regulators, thus matching exactly
the scope of the market of the respective former national monopolies. As a
result of this, Europe continues to have- 27 different regulatory systems in
telecoms. Cross-border footprints of telecoms operators thus continue to be an
exception on Europe’s telecoms market, and cross-border telecoms services
are virtually non-existent.

It is clear that in the US, AT&T
still plays quite an important political role up to now. But I would say that in
Europe, there is certainly no policy maker who can afford to ignore the
incumbents.

With respect to employment, Europe’s incumbents represent nearly
half of the 1 million employees within the EU telecoms services sector.

Given their history, there is still a vast majority of Europe's incumbents
who are at least partially owned by the State. For instance, Deutsche
Telekom is 31.3% owned by the German state, France Telecom at 33.1%, TeliaSonera
at 45%, Belgacom at 50%, and P&T Luxemburg even at 100%. Only a minority of
telecoms incumbents are no longer owned by the State: BT, KPN, Telefónica
and Telecom Italia are certainly the most notable examples for this, even though
you will probably agree that the lack of a formal ownership link in these cases
does not mean that the government would view you as companies like any
other.

Beyond ownership links, Europe’s telecoms incumbents play a very
important economic role.

First of all, in a European telecom service market worth € 347
billion, or 2.9% of the EU’s GDP, incumbents account for 71% of
aggregated revenues.

Secondly, the incumbents account for 72% of total investment in the
sector.

And last but not least, incumbents continue to be key for Europe’s
competitiveness in the world: six of the top ten telecoms companies in the
world are European; and five of them are incumbents.

Of course, this
economic power has a direct relationship with the level of competition on the
telecoms market. I will not spoil our discussions by recalling, here in
Venice today, all the well-known figures about the market shares of the
companies around the table. Just three examples;

Regarding the mobile market, three out of four European citizens are
subscribers of one of the four main mobile groups: Deutsche Telekom, Vodafone,
Telefónica and Orange. Three of these groups are mobile branches of fixed
incumbents.

Regarding the retail broadband market, the incumbents’ market
share remains stable at around 45% in 2008.

81.7% of EU fixed subscribers still rely today on the incumbent's
infrastructure for direct access.

Of course, many of you will see
these figures as demonstration of your economic success. You will certainly
understand that the Commission and national regulators have to look at them also
from the angle of effective competition. These figures also show to us that
ten years after the opening of markets to competition, the job of regulators is
only half done. I know that you do not like me saying this. But this is my
role as European Telecoms Commissioner. It is because of your economic and
political power that the Commission has to remain vigilant, as the independent
guardian of competition in the European Union.

2. Europe’s telecoms incumbents and regulation

Some words at this stage about telecoms incumbents and regulation. In this
context I know well that for many telecoms incumbents, the term
“regulation”, especially if combined with “Europe”,
still has a very negative connotation. Some of you have come to me in recent
years to ask for a “regulatory holiday” – as if regulation was
something that you could simply suspend when you feel like it.

Some of you also have come to me in the past weeks and told me that now,
because of the financial crisis, it would be time to soften or even to abandon
telecoms regulation. Let me address this request once and for all today in this
meeting.

First of all, I firmly believe that regulation taking care of competition
always has a positive effect on the economy. Times of economic
difficulties are thus not a reason to suspend the principles of competition
law. The European Commission shows this very clearly in these days, when we
apply swiftly and non-bureaucratically our state aid rules to new aid packages.

Secondly, there is a very interesting lesson from the ongoing financial
crisis for the overall perception of regulation. It is certainly not
over-regulation that has caused the financial crisis! Financial market
regulation will rather now become an urgent priority for policy-makers around
the globe. As a Christian Democrat who believes in the social market economy, I
always call for caution in this respect, especially when I see now some
countries praising the State as the right response for everything. Regulation as
such has no added value. Regulation must always be targeted to the problem and
achieve results effectively and within a reasonable time-frame. But you and
your lobbyists should be aware that the times when one could simply say
“no regulation” to have policy makers and public opinion on your
side, that these times are over now.

I note with interest that in Germany, a country with a strong
“anti-regulation reflex”, the mood has changed dramatically in the
past months. In 2005, 28 per cent of Germans thought that the State would
regulate “too much”, while 25 per cent thought it would regulate
“too little”. In October 2008, only 8 per cent of Germans still
thought that the State would regulate “too much”. While 37 per cent
thought that the State would regulate “too little.”

The telecoms sector is certainly different from, though linked to, the
financial markets. I am personally convinced that, for the time being, and if
we want to continue the evolutionary path of Europe’s model of telecoms
regulation, we cannot do without some regulation and some regulatory supervision
in the telecoms markets. We have of course to be flexible in our approach,
and add new incentives for investment, as we propose to do it in the
Commission’s Recommendation on Next Generation Access. I invite ETNO to
make use of the ongoing public consultation to give the Commission a
common view on this important matter, especially as regards the risk
premium needed for legal certainty when investing into next generation networks.
But competition must remain the main driver for market development. This
is particularly important in telecoms because this sector exhibits features such
as network effects, positive externalities and economies of scope and scale
which tend to favour bigger market players.

We could only make regulation superfluous in the telecoms sector if we
were to take radical regulatory decisions to remove competition bottlenecks once
and for all. To give you one example: if the industry decided today to move
at once to a “bill and keep”-system in Europe, we would no longer
need to regulate termination rates. But I understand that this is a decision
that many of you would not be prepared to take today. So “bill and
keep” will continue to be an option for the medium term – but it
will be achieved not by revolution, but step by step, by progressively lower
termination rates across Europe, as the Commission is recommending. And this
process will continue to require regulatory pressure both from the Commission
and from national regulators.

Let me say a last, more nuanced word about telecoms incumbents and
regulation, because I am well aware that there are clear differences among ETNO
members. I note well that there are some of you who have started to accept
and live with regulation. In the UK, BT has accepted functional separation
and is even advocating this model as “competitive advantage” abroad,
as it is clear, gives legal certainty and stimulates investment. And also
Telecom Italia is now going voluntarily, in cooperation with the Italian
regulator AGCOM, into the direction of non-discriminatory access to its network;
the Commission will monitor the results of these efforts here in Italy very
closely to see if the process is completed as ambitiously as it has started.

3. Europe’s telecoms incumbents and the unused potential of the
single market

Let me finally turn to the still unused potential of the single market for
telecoms incumbents.

I remember well that only four years ago, I had a very strange visitor in my
office in Brussels. He was the CEO of one of Europe’s largest telecoms
incumbents. When I mentioned in our discussion the “single market for
telecom operators”, he first looked at me, in disbelief. He then said very
categorically: “I am not interested. My business future is not in Europe.
It is in the US.” Well, this gentleman is not a CEO any more. But his
words still reflect, I know this only too well, the views of many of you present
today.

If I look around this room, I have to say that the telecoms companies who
regularly come to talk to me about the need for a single market in telecoms are
– US companies. Ladies and gentlemen, is this not surprising? Can it
really be true that only AT&T, Verizon and Vonage want to do business in
Europe across borders? That only US companies have a business model that
would allow them to make it profitable to offer telecoms services in 5, 10 or
more EU countries?

CEOs of many European telecoms incumbents often tell me that telecoms
markets would be “mainly national”, and this is a view wide-spread
among many Telecoms Ministers as well. This is, honestly, nonsense!We
are talking here about a sector where business is based to a large extent on
radio spectrum and the Internet Protocol – and thus on technical resources
that, by definition, do not know economic borders. It is also a sector based
on a consumer demand which crosses borders – just think of your business
customers who would like to have seamless communication services, whether their
subsidiary is based in Helsinki, Bilbao or Sofia, and this at similar conditions
across Europe.

Your US competitors understand this well: At home, they are used to doing
business in a single market. So for them, a single market is nothing
sensational. For them, it is obvious that regulatory fragmentation of an
economic area comes at a high cost.

So if there is no technological or business need for fragmentation of our
single European market in the telecoms field, only one possibility remains:
It is a deliberate policy choice. A choice of telecoms ministers and
regulators to have not one, but 27 telecoms markets.

Are you as Europe’s telecoms incumbents really sure that you want to
continue to support this policy choice? I know that it may be convenient, in the
short term, to enjoy the protection of national rules and regulations. In some
cases, a weak national regulator, willing to listen a lot to the national
government and to the incumbent and prepared to ignore regulatory developments
in neighbouring countries, may be a wonderful thing to have. Perhaps, this will
allow you for some time to keep competition from abroad at bay. And to prolong
badly needed transformation and modernisation processes a bit longer.

But is regulatory fragmentation and national protectionism really in the long
term interest of Europe’s telecoms incumbents?

It is certainly not in the long term interest of the European economy,
especially of all your business users. Poor and inconsistent national
regulation is extremely damaging for Europe’s economy, in particular in a
growth sector such as telecoms. Professor Martin Cave has recently
calculated that the present lack of a single telecoms market comes at a very
high price for Europe’s economy. According to him, the additional cost
of regulatory fragmentation in telecoms is €20 billion per year for
Europe’s businesses. Commission experts believe this figure to be
still a very conservative estimate.

€20 billion which Europe could save per year by improving its
regulatory system and advancing its single telecoms market – ladies and
gentlemen, there is thus no time to lose! Let us act rapidly before the
effects of the financial crisis trickle down through the rest of the economy.
Let us give a new spur to Europe’s economy by making a bold move to
complete the single telecoms markets.

A single telecoms market would in my view offer a great potential not only to
the European economy at large, but also to Europe’s telecoms operators
themselves. Today, incumbents derive only between 5% and 27% of their income
from their European business outside their home country. This leaves substantial
scope for growth. But it is clear that at present, it remains difficult for,
say, a French operator to invest in Spain if regulatory decisions on next
generation access differ substantially in both countries. And I compare with
interest your comments on regulatory issues with that of your subsidiaries in
those Member States where they are in the position of a new market entrant.

It is even more clear that – to mention a particularly drastic example
– operators will be hesitant to invest in the promising Romanian market if
the chief of the national telecoms regulator can be fired twice within 3 years,
followed each time by a complete reorganisation of the national regulatory
authority by Government Emergency Decree! This is exactly the kind of
problematic situation Professor Cave refers to when he talks about the cost of
poor and inconsistent regulation.

It is good for the European economy to have healthy incumbent operators who
are able to invest in large scale projects spanning the whole territory of the
EU. It is good to have incumbent operators who are able to invest abroad and to
become significant market players in some of the fast-developing regions of the
world. But for this, we need to create the right regulatory conditions in
Europe.

Let us therefore complete swiftly the ongoing work on Europe’s telecoms
reform package which, following the impressive vote of the European Parliament
on 24 September, has now reached political maturity. The new framework will
encourage operators with a cross-border footprint to become truly pan-European
operators. It will also encourage national regulators, via the new Office for
the European Telecoms Regulators, to add a badly needed European perspective and
stronger independence to their work at national level. A final agreement is
within reach, and it could allow us to complete the single telecoms market in
Europe by 2010.

I call on you, incumbents, and your association ETNO, to re-think your
policy recommendations to national ministers. You have to take a decision: Do
you want to be friends or foes of a single telecoms market in Europe? Do you
really want to let, for short-term reasons, the single market slip away to your
US competitors? Or do you want to show the way to a modern, competitive European
telecoms sector which will, once again, be the driving force for growth and jobs
in the whole European economy?

Ambitious political decisions on Europe’s single telecoms market are
certainly the best response to our sector in the current economic situation. But
we need to act now.

Thank you very much for your attention.

[1] I regret that there was one
very important European CEO who did not make it to yesterday's evening
discussions. But I of course understand that it is not always easy to resist the
attractions offered by Venice at night ....